Northeast Bank

Welcome to the Northeast Bank Second Quarter Fiscal Year 2024 Earnings Call. My name is Daniel and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, JP LaPointe, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, An investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the investor relations section of northeastbank.com under events and presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star 1-1 on your touch-tone phone. As a reminder, the conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligations to update any forward-looking statements. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you very much.

Good morning to those of you listening to the call. This morning

I want to go over a few of the interesting and important results during the quarter. And I'm not going to go over line by line what's already in the earnings release, because I am sure that you have read that or that you will read that. But I just want to spend a little bit on page three of the slides, first talking about the loan volume in the quarter, the purchased loans activity of 186.1 million invested on $208 million of UPV or an 89.5% purchase price is our second strongest purchase quarter, only behind the approximate $1 billion of loans purchased one year ago. So very, very strong. And on that topic, on the purchase loan market, we're seeing a fair amount of good, very good supply in the marketplace. And so we're looking at a lot. I would caution you that you know, they're binary, you know, you bid and you win and you don't win, but there seems to be a fair amount of supply in the marketplace. On the origination slide perspective, we originated $63.5 million of loans, which is, it's not that it's a bad number, but it's kind of a low number consistent with, you know, the trends over the prior quarters. You know, I can say that as we sit here today, The origination volume is picking up. And I would expect that we will have higher numbers in the current quarter than we had in the quarter that ended December 31. The weighted average rate on our entire loan portfolio, originated loan portfolio was 9.45%, which is very strong. And then just to take a look at some of the quick stats, our net income was $14.1 million. And that was after we charged off 957,000, about almost a million dollars of a deferred tax asset due to changes in the way Massachusetts will set out their apportionment factor. So the income was very strong. And the EPS was 185. Return on equity was 17.35. Return on assets was 1.93. And tangible book value has grown to just a few pennies under $42 at $41.97. If we go now to slide eight, which I am going to, I want to make a few comments on asset quality. First, you can see that there was a jump in nonperforming loans uh in the quarter that just ended from the previous quarter um that's principally due to three loans that went on non-accrual in the quarter kind of the headline is we don't think that we're going to have on those and do we think they'll be resolved without any principal loss you know a couple of them were kind of typical purchase loans that are typical loans in national lending where they go late and then we resolve them, plenty of collateral coverage. And the first one for about $6 million is a dispute over a lien position, our mortgage and others. And in the courts and in the event that we were to lose that, we have title insurance. That's why I say I don't expect to have any principal loss from these loans that are now are non-accrual. I also want to bring your attention to the bottom right corner of this page eight where we take a look at net charge-offs. CECL has caused us to, has required that we change the treatment of purchased loans, which has an impact on how we report charge-offs. And I think the best way to make this point is to give you an example. If in a pool of loans, let us say there was a loan that had a $50,000 customer balance, but when we bid for the loan along with a bunch of other loans, we've allocated $0 to it. We got the loan, but we didn't pay anything for it. Under pre-CECL, we would just carry that loan at zero because we didn't pay anything for it. But in the case of CECL, you're now required to carry that loan, show the loan at $50,000 with a corresponding allowance of $50,000. So it nets to zero. And at some point, if we charge off that loan, then it shows that $50,000 would show as a charge off, even though we didn't have any principal allocated to that. So keeping in mind those new rules under CECL, you'll see that, and there's a footnote on this, in the case of quarters ending September 30, and also on December 31, out of the 0.07% in 930 or seven basis points. Six basis points of that was a number attributable to CECL, which, as I described, there was no loss of principal. It's just the way you have to report it for accounting. So there was only one basis of charge offs in September 30. And for December 31, the same point that we're showing 11 basis points here or 0.11%. But out of that 11 basis points, nine basis points are as a result of CECL, where there was really no loss of principal. So if you strip that out from those two numbers, the charge-offs for the quarter ending September 30th was one basis point. And on December 31 was two basis points, not much at all. That's way in the weeds, but because it's a change, I just wanted to try and explain that for you. If we now move on to slide nine, this is a slide that shows the change in the nonperforming loans from September 30 to December 30, I mean, from September 30, 23. Richard Schauffler, To this September 3023 part sorry for that to December 3123 and you can see it's gone up from 17 point around here 5 million to 30.7 million and most of that are the three loans designated one, two and three, which I spoke about. Richard Schauffler, Just a couple minutes ago and then there's another one on. designated as number four for 1.1 million, which subsequent to quarter end was paid off in full, which is my expectation for the other ones as well. I do want to comment on page on the deposits on interest rates starting on page 15. And you can see that for the quarter, our quarterly cost of deposits was 4.16% and continuing the upward march of rates. And the spot rate on the last day of the quarter was 4.23%. The good news around our funding is we're starting to see our costs coming down. And we have, for example, $700 million of brokered CDs maturing over the next six months, which at today's rates, we could replace at a 40 basis point savings, which is quite substantial. And I also want to highlight on page 16, that looking at uh what's happening by channel in our deposits over the last year and the the main point i want to make is that in our in our banking centers we have seven um that our deposits in those banking centers have gone up by 216 million dollars um or 38 percent from a year ago, which we're really, really happy about. And we're continuing to build those core deposits in our branches as a way of replacing higher cost deposits and other categories. Finally, I do want to comment on the expenses on page 19 that have gone up from the link quarter about $300,000. It's mostly in the compensation line. In December, we gave every employee in the bank, I would say other than Pat and me, $1,000 each for the end of the year was about $200,000. Well deserved by our great team and increased morale. Everyone was excited. about that and then also in this quarter we had a full quarter of stock compensation we make stock grants typically in august and so for the preceding quarter it was only half a quarter that was reported of that expense and in the current of the quarter ending december 31 it was a full quarter so that's about four hundred thousand dollars of the difference. And then we had some savings in some other areas. And I do want to say before we turn it over to any questions that this is in some ways it's a bittersweet day for us. It's sweet because we had another really great quarter. It's bitter because JP is who many of you have talked to, I know and like and respected. is leaving our bank to take a position at another bank after being with us six years. He will be missed by everyone. He's really built a great group. We have the privilege of working with him day in and day out. He's really a first-rate person. He's a good father and a good husband. His colleagues like and respect him. and the quality of his work is extraordinary and so we will we will miss him but he will be part of our alumni club and we will all get to see him a lot i hope um and so today is his last day he's been totally professional he gave notice maybe six weeks ago or seven weeks ago and has worked diligently every single day and so we all wish him every I don't have to say the best of luck. He doesn't need luck. He will be successful, but he will be missed. And on that note, we'd like to turn it over and see if there are any questions at all.

Thank you. We will now begin the question and answer session. If you have a question, please press star 11 on your touchtone phone. If you wish to be removed from the queue, please press star 11 again. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 1-1 on your touchtone phone. One moment for our first question. And our first question comes from Alex Twerdahl with Piper Sandler. Your line is now open.

Good morning. Good morning, Alex. First off, Rick, you said in your prepared remarks that you're seeing a fair amount of good supply in the marketplace for purchases, which seems like an optimistic statement. However, I was hoping maybe you could give us a little bit more context and a little bit more color around what you're really seeing and maybe compare it to what you've seen over the last couple quarters.

Well, the last quarter was also a strong quarter. a good quarter for purchase is not like this quarter. This was a much better one. You know, we're seeing loans coming to market from banks for a reason, some having to do with sales that, I don't want to be too specific here, but, you know, started with some of the banks that failed, you know, in the last year that some of those assets have been now coming to the market to be traded. You know, it's public information that the signature assets were sold and bought by a few different groups. You know, we're seeing banks selling who, you know, want to shed some commercial real estate assets. And that's not unusual. You know, we tend to see that. I'd say we're maybe starting to see it with some banks who are a little bit smaller selling loans as well. I don't mean small banks, not the national banks. And we're seeing the kind of assets that we tend to like in this market, which are low LTV, where a lot of the discount is driven by interest rates. So if rates come down again, well, one, we're getting them just because the interest rate discount and at good prices. But secondly, there's an opportunity for some upside in those. if rates come down, so some of those folks can refinance more easily. Pat, do you want to add anything to that?

Yeah, I think that's a good summary. The last quarter and this quarter, M&A is always a factor, balance sheet repositioning, and in some cases, funds who purchased mixed pools last year are trying to trade out of the higher you know quality assets um you know now and because of because of the yields on those um yeah so those are the big the big reasons we're not really seeing much distress yet except for the signature stuff yeah um in in terms of the pools that you're you look at but then you don't wind up buying i know it's obviously binary you get it you don't but when you're losing

those pools, is it because the buyer is just not liking the price and keeping it, or is it because there's other competition out there that's winning those?

I think, well, there's always competition out there, and it's always good to know that there's a market and we're not the only buyers so that we can gauge our own pricing. But I'd say that after that, the two big factors are that Sellers sometimes find it hard to believe that performing loans would trade at that big of a discount and choose not to sell. And another factor is that in some cases with loans that were underwritten at very, very low cap rates in the real estate, there's a disagreement around value. And that's also a factor.

Got it. And then I'm just curious, you know, pretty big pullback in rates, you know, sort of in the middle section of the curve in the middle of the fourth quarter towards the end of the fourth quarter. How does that impact, you know, the sort of the sales process and pricing?

Al, your question is because of rates declining in the fourth quarter, does that impact the pricing of the loans? Is that your question?

Yeah, I mean, I would assume it has to impact the pricing, but I'm just curious, you know, if there's, you know, if that would be an obstacle to having stuff closed in the fourth quarter, just given that the rates are moving down and the volatility maybe is not the friend of the market, but, you know, I don't know, so I'm asking.

Yeah, I don't think that in the fourth quarter and what we did, that was such a big deal, you know, the rate change in the fourth quarter, it You know, it would be, you know, longer if rates come down a lot than you would expect, you know, that you would be buying loans at a lower yield. But we haven't seen that impact yet.

Yeah. I mean, from the pricing, pricing is always a little bit hard to sort of draw real conclusions from because we don't really know what the underlying loans look like. But would it be fair to assume that the sort of the full-on return on the purchased portfolio based on what you're purchasing, stays kind of within the range in which it has been in the last two quarters?

Well, we paid 89.5 cents this quarter for what we purchased. I think it's kind of typical for what we've bought. You know, it's kind of low LTV. You know, kind of what our expectation is on yields is about the same as, you know, we have been in the past. has there hasn't been there hasn't been a big overall on any given loan you know you can you know buy something at a lower price and get paid off early and that can impact it but looking kind of portfolio wise on what we've purchased i think it's pretty much as as we have in the past you know you may recall of course there's two components of course to what you earn what is the rate on the note and secondly how much is the discount and When does the loan pay off? That ultimately generates the yield. And going back a lot of years, when we started this in 2010, at that very time, the FDIC from banks said it closed. We're selling loans at $0.80. And then directionally correct over the next five, six years or something, we were buying loans between 82 and 87 or 88. And then for a period of time, you know, we were buying them at 92 or 93 cents. And if you look back at the, you know, the big purchases over the last year, the billion dollars was roughly at 87 cents. And what we purchased in this quarter, which is the second largest quarter, was at 89 and a half cents.

Right, right. So switching gears to the originated portfolio, just, you know, I think you mentioned that the pipelines have picked up a little bit heading into the first quarter. Is that, do you think that that portfolio will stabilize? I mean, I know you're coming off of a couple of huge origination years, you know, in 22, and, you know, you've seen a little bit more amortization maybe as a result of that. But, you know, how do you think about sort of the overall size of that portfolio and whether or not production will be able to fully offset? I think it'll grow. It'll grow?

I think it'll grow, you know. Over the last bunch of quarters, there was much less activity. There was less clarity on value, less deals being done. We're seeing that activity pick up. And during that time period, we saw a lot of things, but we said no a lot. And we're seeing more now the kind of deals that we like to do and with a lot of volume coming in. And I expect it will grow. And you may remember that before we had the big purchase a year ago, you know, we were mostly an origination shop. So going back, make it the, say, June 30, 22, if I'm off by either dollars or when the year was, I apologize. But I think generally we did like 550 of originations and 175 million of purchases, something like that. So that was 75% originations. And 25% purchases, you know, now it's kind of flipped. But I expect that we're hopeful that the purchase numbers will continue to be meaningful and significant, but the origination numbers will pick up.

Good.

That's helpful. And we get really good. I was just going to say, we get really good pricing on our originations. It's kind of the same pricing we're getting on our purchase books.

Yeah, I mean, maybe just kind of stick on the pricing on the origination portfolio. I know a lot of it's prime based and you have floors in place, but maybe, you know, just given that the outlook for rates now is maybe prime coming down, you know, at least several times this year. You know, is there any other considerations that we should have in the back of our mind with respect to the trajectory of the yield of that portfolio?

So I think you said it in your preamble to that. which is they're either prime, they're all floating, either prime or SOPR. Most of the loans have floors in them, usually set at the rate when the loan closes, but in some cases, you know, the floor is less than that. So we have not 100% protection on our current rates, but a lot of protection on our current rates on that.

Great. And then the final thing I wanted to ask about is that it looks like there was a pickup in the gain on sale of SBA loans. And I know that there's some initiatives kind of with SBA, you know, product. Is that higher level of gain on sales, is that indicative of maybe a little bit more success in that product? Or maybe talk through, you know, what you're seeing and kind of expectations we should have from here.

It has picked up. The volume for this quarter was about $14 million, which is a lot more than it was a year ago. And it's got the potential to continue to grow. And so therefore, we're selling off always the guaranteed portion. And so therefore, the revenue has been going up. Robert Marlayson, You know how much more I am with it with this product, even from the beginning, I was, and I am now very reluctant to make a prediction on volume or you know contribution to earnings from this. Robert Marlayson, Product. Robert Marlayson, Other than just reporting as it happens, so you know you saw the numbers on what they what the game was and then part of the sale. of what we sold in the game. Some of it was originated last quarter, you know, a bunch of it this quarter. And then at the end of December, we were holding on balance sheet some of the guaranteed portion that we hadn't sold in the quarter, but would have sold in January.

Okay.

Sorry, that's not a great answer for you. I know, Alex, but I don't want to, I'm not trying to blink and say things are bad or good. I'm just saying it's a little bit hard to predict, and I don't want to go too far on a limb saying what that will be.

Yeah, we'll be happy to see the uptick in the quarters in which we see it. Thanks for taking my questions, JP. Best of luck in your future endeavors, and that's it for me.

Thank you, Alex. Thank you, Alex. Thank you.

We have no further questions at this time. Now I will turn the call back over to Rick Wayne for closing remarks.

Thank you. All of you that are listening and all of you that will listen when you go online to listen to this, appreciate your support and look forward to talking again in April.

Thank you. We're all set, operator. Thank you. Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.